Corporate Finance

• What is the definition of scarcity in economics?

  Scarcity is an economic concept where individuals must allocate limited resources to satisfy their needs.
• When does scarcity occur?

  Scarcity occurs when demand for a good or service is greater than its availability.
• How does scarcity affect consumer choices?

  Scarcity limits the choices available to consumers in an economy.
• What happens to natural resources that are widely accessible?

  Some natural resources that are easily accessible eventually prove scarce as they are depleted from overuse.
• How does scarcity affect the monetary value of goods and services?

  Scarcity affects the monetary value individuals place on goods and services.
• What is the primary focus of finance in economics?

  In finance, we care about the allocation of a specific scarce resource: money.
• What does finance deal with?

  Finance deals with decision making related to money, investments, and markets.
• What are the components of finance?

  • Economics (decision-making)
  • Statistics (dealing with uncertainty)
  • Accounting (the language of business)
• What does corporate finance cover?

  Corporate finance covers every decision a firm makes that may affect its finances.
• What is the ultimate purpose of corporate finance?

  The ultimate purpose of corporate finance is to maximize the value of a business through planning and implementation of resources, while balancing risk and profitability.
• What are the three main types of decisions in corporate finance?

  • Investment decisions
  • Financing decisions
  • Dividend decisions
• What do investment decisions in corporate finance involve?

  Investment decisions involve deciding what projects or acquisitions to invest in.
• What is the goal of financing decisions in corporate finance?

  The goal of financing decisions is to determine how to fund capital investments and optimize the firm's capital structure.
• What do dividend decisions in corporate finance entail?

  Dividend decisions involve deciding how and when to return capital to investors.
• How has the view of business evolved over time?

  • 19th Century: Traditional view focused on wealth creation and economic progress.
  • 20th Century: Continued traditional views, with environmental concerns as externalities.
  • 21st Century: Shift towards sustainability and corporate social responsibility.
• Who authored "The Modern Corporation and Private Property"?

  Adolf Berle and Gardiner Means authored "The Modern Corporation and Private Property" in 1933.
• What did Milton Friedman famously state about business?

  Milton Friedman stated, "The business of business is business."
• What does corporate sustainability start with?

  Corporate sustainability starts with a company’s value system and a principles-based approach to doing business.
• What are the fundamental responsibilities in corporate sustainability?

  Fundamental responsibilities include human rights, labor, environment, and anti-corruption.
• What is the definition of a project in finance?

  • A project generates a series of cash flows with an upfront investment.
  • Example: A coffee shop requiring an investment of £100K with expected earnings of £50K per year.
• How is a firm defined in finance?

  • A firm is a collection of projects.
  • Example: A coffee shop is a single project, while Spotify encompasses several projects.
• What is the financial decision facing individuals regarding consumption?

  The financial decision is whether to consume (spend) or save (invest).
• What is the role of financial institutions in the financial system?

  Financial institutions raise finance for investments and manage savings and pensions.
• What is a corporation commonly referred to as?

  A corporation is commonly known as a firm, company, or business.
• What distinguishes a corporation from its owners?

  A corporation is a distinct, permanent legal entity separated from the persons that form or own it.
• What does limited liability imply for shareholders?

  Limited liability implies that shareholders cannot be held personally responsible for the corporation’s debts.
• What are the types of businesses?

  • Sole Proprietorship
  • Partnership
  • Corporation
• What is the separation of ownership and control in corporations?

  • Shareholders appoint managers to run the company on their behalf.
  • This separation gives corporations permanence.
• What is the agency problem in corporate governance?

  The agency problem is the possibility of conflict of interest between shareholders and management of the firm.
• What are agency costs?

  Agency costs are costs that arise from the conflict of interest between shareholders and management.
• What is corporate governance?

  • Corporate governance is the relationship between shareholders, board of directors, and management.
  • Good corporate governance mitigates agency problems.
• Who is responsible for financial policy and corporate planning?

  The Chief Financial Officer (CFO) is responsible for financial policy and corporate planning.
• What is the role of the Treasurer in a corporation?

  The Treasurer is responsible for cash management, raising capital, and banking relationships.
• What does the Controller do in a corporation?

  The Controller is responsible for preparation of financial statements, accounting, and taxes.
• What are the key concepts in finance?

  • Real Assets: Tangible and intangible assets used in production.
  • Financial Assets: Claims on income generated by real assets.
  • Time Value of Money: A dollar today is worth more than a dollar in the future.
  • Risk and Return: Higher risk requires higher return.
  • Cost of Capital: Return required by investors.
• What is the time value of money?

  The time value of money is the concept that a dollar today is worth more than a dollar in the future.
• What does risk refer to in finance?

  Risk is a measure of the surprise that awaits us, and investors dislike risk.
• What is the cost of capital?

  The cost of capital is the return that an investor requires to invest capital in the firm’s projects.
• What is the formula for future value (FV)?

  The formula for future value is $FV =$$PV \times (1 + r)^n$.
• What is the future value of $100 invested at 8% for 2 years?

  The future value is $100 \times (1 + 0.08)^2 =$$116.64$.